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A Brief History
When oil was discovered in Mexico's Faja de Oro in 1910 by the British-owned company
Mexican Eagle, an oil rush began that spread far beyond Mexico's borders. The instantaneous
and fabulous wealth created for Sir Weetman Pearson (later Lord Cowdray) by the discovery of
the Potrero de Llano well meant that other, primarily U.S., firms entered the Mexican market
seeking to discover such untold riches for themselves. In the space of a few years, Mexico had
become the world's second largest oil producer, supplying one fifth of U.S. demand.
Although Mexico was soon left behind in terms of production levels and technology as
compared to US, its nationalization and the creation of PEMEX (Petróleos Mexicanos) in 1938
set a precedent that would be followed years later around the world. The National Oil Company
(N.O.C.) would become a model copied at different times and places, involving very different
business strategies and rationales, and ultimately the N.O.C.'s would come to challenge the
control of reserves.
Cantarell's fall over the past few years has been precipitous. From a high point of 2.136
million barrels per day (bpd) in 2004, production had declined to only 545 thousand bpd by the
end of 2009. Cantarell was the mainstay of Mexican production for almost three decades, and its
rapid decline has pushed PEMEX to scramble for alternatives. Lacking the technological and
technical capacity to venture successfully into deep water exploration, where it is believed most
of Mexico's remaining reserves are to be found (estimated between thirty to fifty billion barrels),
This loss of over one and a half million barrels a day in oil production has been partially
surpassed Cantarell as the nation's highest producing oil field and continues to pump out around
850 thousand bpd. K.M.Z. will begin to decline within the next three to five years, but in the
day
Ol
i 500 4
450 Production
4
400 Exports
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350
3
300
250 2
200 2
150 1
100
1
Aug-04
Aug-09
50
Dec-02
Feb-07
Dec-07
Apr-06
Jun-05
Oct-03
Oct-08
0
1980
1995
1998
2007
1986
1989
1992
2001
2004
1983
Fiscal Policy
The years before to the financial crisis, the Mexican Government had followed a
balanced budget rule in line with the Federal Budget and Fiscal Responsibility Law (Ley Federal
de Presupuesto y Responsabilidad Hacendaria (LFPyRH)). Thus, when the global crisis escalated
in September 2008, the budget was balanced. However, there were a number of sources of
vulnerability for the fiscal accounts. First, a high dependence of government revenues on oil
income, given that between 30 and 40% of public sector revenue comes from crude oil exports.
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Second, the deterioration in the outlook for economic activity was expected to reduce tax
revenues. Third, the rigid structure of public expenditures leaves little room to adjust them. In
particular, Mexico had enjoyed a windfall of oil revenues for several years, and a significant part
of those extraordinary revenues was used to increase public spending, for example in social
As the crisis began to hit the poorest segments of society, the federal government made
efforts to adopt measures to try to attenuate the adverse impact of the crisis on economic activity,
infrastructure, freezing household energy prices, decreasing industrial electricity tariffs, and
budget for 2009, set out in light of the LFPyRH, was modified, allowing it to shift from a
However, by mid-2009, the economic recession had turned out to be deeper than
anticipated and oil prices were also lower than had been expected. Under those conditions, there
was a substantial decline in public sector revenues. This situation, along with the aforementioned
downward rigidity of public expenditures, weakened the country’s fiscal position, which limited
It thus became urgent to adopt measures to close the increasing gap in the fiscal accounts.
At first, the federal government used non-recurrent revenue sources such as savings previously
made in the oil revenue stabilisation funds and exercising the oil price hedging options.
However, the government also expressed the need to implement fiscal reform in order to
structurally strengthen public finances. The Mexican Congress approved fiscal tightening
measures for 2010, including some public expenditure cuts and higher taxes. Among other
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things, these included a permanent increase in the general VAT rate, permanent and temporary
increases in excise taxes, temporary increases in income taxes, and limits on tax deferral
mechanisms for corporate groups. The fiscal effort amounted to approximately 2% of GDP.
the country’s fiscal position and was crucial in restoring investors’ confidence. It is worth
mentioning that the recent concerns about the sustainability of the fiscal accounts in a number of
euro area economies highlight both the risk of weak fiscal positions, and the urgent need to
Monetary policy
The challenge for the central bank was to help restore the orderly functioning of a
number of financial markets in order to prevent a systemic risk episode, and at the same time
avoid a deterioration in inflation expectations, which could put price stability at risk.
During the first half of 2008, the sharp increase in the international price of commodities
led to higher inflationary pressures in Mexico. At the time, economic activity had not been
significantly affected by the crisis originating in advanced economies, and the Bank of Mexico
decided to tighten monetary conditions. The goal for the overnight interbank interest rate was
raised from 7.5% in June to 8.25% in August. These actions were partly preventive, as they were
In the second half of 2008 the global financial crisis escalated, negatively affecting
economic activity and disrupting the normal functioning of the financial markets. The
stabilisation of domestic financial conditions was, indeed, crucial. At the same time, the
following factors contributed to a further worsening of inflation in the last few months of 2008:
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consequently, their effects on consumer inflation remained present during the last quarter of
2008. ii. The domestic currency depreciation following the events of September 2008 also
affected inflation.
Under this scenario, although the outlook for economic activity began to deteriorate, the
Bank of Mexico decided to leave its policy rate unchanged, mainly in response to increasing
concerns about inflationary pressures and their potential negative impact on inflation
expectations. At the time, the central banks of advanced economies had already implemented
aggressive policy rate cuts. Therefore, the Bank of Mexico’s decision contributed to widening the
interest rate differentials among Mexico and developed economies, particularly the United
States. This implied a further tightening of the monetary policy stance in Mexico.
By early 2009, inflation appeared to reach a peak and started to fall, while prospects for
growth deteriorated. Lower food and energy prices and a wider output gap reduced inflationary
pressures, although inflation remained higher than in advanced economies. The balance of risks
deteriorated significantly, tilting towards the side of economic activity, while inflation
expectations remained relatively well anchored. The weak economic activity during the first
quarter of 2009 worsened in the second quarter of that year. This poor performance led to a
downward revision in growth prospects for the year as a whole. A potential recession became the
main cause for concern. Thus, the central bank began a loosening cycle, rapidly cutting the
Final remarks
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Policymakers faced the challenge of restoring orderly conditions in the financial markets: timely
and decisive actions were needed. In particular, coordination among the different authorities was
crucial, given the need to use different policy instruments. In this setting, several measures were
implemented to provide liquidity in both domestic and foreign currency, as well as to restore the
normal functioning of a number of domestic financial markets and reduce exchange rate
volatility. The policy response in Mexico helped to contain the financial crisis and prevented the
drop in liquidity from evolving into insolvency problems for some domestic financial
institutions. This situation would have significantly threatened the stability of the Mexican
financial system. The Mexican banking system ultimately proved to be very resilient to the
shocks facing the global financial system. In fact, throughout the worst period of the crisis,
Mexico continued to be in the black with capitalisation indices well above those required by law.
The Mexican economy had to adjust to an environment characterised by lower external revenues
and reduced access to external financing. It seems that the fiscal and monetary policy mix used
was the appropriate macroeconomic policy stance, as it led the economy through the required
adjustment with the lowest cost. Furthermore, the tax reform approved by Congress improved
the fiscal position of the country, which helped to reduce the risk perception of the economy,
while also diminishing pressures on non-tradable goods inflation. Central bank actions were
geared to restoring orderly conditions in the domestic financial markets and monetary policy was
loosened as the balance of risks tilted towards economic activity. The use of monetary policy to
support economic activity, however, was limited by the need to contain inflation expectations
generated by the nominal exchange rate depreciation and the indirect tax hike.
References
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https://scholar.smu.edu/cgi/viewcontent.cgi?article=1483&context=lbra
2. https://www.coha.org/mexico-an-oil-nation-in-crisis/
3. https://www.spglobal.com/platts/en/market-insights/latest-news/electric-power/103020-
bp-to-shut-australian-kwinana-refinery-convert-it-into-fuel-import-terminal
4. https://www.bis.org/publ/bppdf/bispap54q.pdf
5. https://www.sjsu.edu/faculty/watkins/mexico82.htm
6. https://finshots.in/archive/the-mexican-standoff/